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Investing for Retirement Requires a Disciplined Approach

by Jerome Clark

Investing For Retirement Requires A Disciplined Approach Splash image

Over the past decade, equity investors have been blindsided by two severe bear markets, a global financial crisis, and the worst recession since the 1930s. As a result, they have seen generally meager investment returns.

So it is not surprising that many had been fleeing stocks and equity mutual funds. Since the stock market peaked in October 2007, industry-wide net outflows from equity mutual funds totaled several hundred billion dollars through 2010.

Historically, investors often have abandoned the stock market during steep downturns, missing out on subsequent recoveries. This time, the bulk of the outflows occurred in 2008, before the S&P 500 index skyrocketed 93% (from March 9, 2009, through the end of 2010).

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Jerome Clark , CFA, is a vice president of T. Rowe Price Group, Inc., and T. Rowe Price Associates, Inc., and a portfolio manager in the Asset Allocation Group.


Discussion

Robert from Georgia posted over 3 years ago:

What are your thoughts about moving your bond allocation into tips
with the prospect of an inflation cycle starting?


Charles Rotblut from Illinois posted over 3 years ago:

Robert,

We published an article about TIPS and inflation last year. Here is a link to it:
http://www.aaii.com/journal/article/tips-and-the-nature-of-inflation-protection

-Charles


Clifford from Pennsylvania posted over 2 years ago:

With 3 years away from retirement - where is non retirement monies (not needed for 5-10 years)best allocated?


Paul from Illinois posted over 2 years ago:

It seems like every allocation scheme is the same. Some of us have other sources of income and don't have to dip into our investments to live on. I am 70 yrs old, retired, and have about 10% in bonds. Most of the equities I have are dividend paying, boring blue chips. What kind of allocation would you recommend for someone like me?


Henry from New York posted over 2 years ago:

Given the 35 year olds lack of the need for income and the ability to withstand the downward movement of stocks, why does that individual have any fixed income exposure?


Henry from New York posted over 2 years ago:

Paul
If I were your financial advisor I wouldn't have you change your allocation.


Warren from Florida posted over 2 years ago:

Equities have a flat performance curve over the last ten years--dividends have been high. High yield bonds have outperformed equities by far over the last ten years. Yet, the potential for a "100 bagger" only exists in equities. This plus inflation means almost every portifolio needs equities.

The per centage of equities in a portfolio will differ with individual circumstances and risk tolerance acceptance. The 35year old may need money now; the retired 70 year old may not need money at all--like Paul.

Age performance charts are interesting, but only about 80% accurate, and their data entry and exit points are critical to their performance.


Warren from Florida posted over 2 years ago:

Equities have a flat performance curve over the last ten years--dividends have been high. High yield bonds have outperformed equities by far over the last ten years. Yet, the potential for a "100 bagger" only exists in equities. This plus inflation means almost every portifolio needs equities.

The per centage of equities in a portfolio will differ with individual circumstances and risk tolerance acceptance. The 35year old may need money now; the retired 70 year old may not need money at all--like Paul.

Age performance charts are interesting, but only about 80% accurate, and their data entry and exit points are critical to their performance.


A Brown from California posted about 1 year ago:

At 86 long retired. Most still in stocks, however about 20% in Annuity fund, not yet drawn on. And Maybe 10% bond and/or bond funds.
So far working, only real problem is inflation.
Drawing all of income from investments and last few years going into 'nest egg.' I charge most expenses, pay once a month all. Noted mostly same purchases, about 30% more charge each month this year than three years or so ago.
Andy


Larry Felder from Florida posted about 1 year ago:

Very True with disiplined hindsight. Will a individual investor with only forsight be able to practice what hindsignt dictates? Who knows.


W Schwandt from Washington posted about 1 year ago:

I started my financial career in 1936 detasseling corn for 25 cents/hour. US 1st class postage was 3 cents. Postage is up a
multiple of 15 times. Had I not started an inflation strategy then I would have never finished college, or retired in 1986 with a respectable nest egg and income. In the subsequent 26 years, I have chosen to deal with inflation by drawing the needed supplementary funds from fixed income investments, and letting the equities grow. I suggest that the allocations in your 10-20-30 year retirement estate building plans are not sufficiently related to future currency inflation.


Richard from Maryland posted about 1 year ago:

My view is that all three of your examples still should be planning for a longer term than assumed and should have more in stocks than. You should set your stock percentage by looking at what income you have or will have outside of investments (relative to you living expenses) and how much cash it will take to keep you from selling stocks. If you have any significant income outside of your investment, I would move all of the allocations to a 10 year older age. I believe the main risk going forward is inflation due to a government that spends far more than it brings in, cannot control entitlements , and keeps printing money. Personally, I find that dividends from stocks make me fell better when stock prices go down which allows me to keep more money in stocks.


Vern Andrews from California posted about 1 year ago:

My view is that as the retiree approaches retirement, he or she should try to ladder his fixed investments to suppply most of his monthly reirement distribution requirements in addition to having equities. I would suggest a use of a Fexible Mix Strategy (equities/fixed investmewnts) that is changed depending on the investing economy-market such that when investing environment is declining significantly the mix is changed toward a 10/90 gradually and visa versa when the investing environment is increasing significantly. If there is tax problem with retirement distributions some considerations should be given to fixed investment minis. Website lifetimestrategies2009.com discusses this method in more detail for self-managed retirement Portfolios'


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